Exam technique and fundamental technical issues for Advanced Taxation - United Kingdom (ATX (UK))

Part 3 of 4

This is the Finance Act 2018 version of this article. It is relevant for candidates sitting the ATX (UK) exam in the period 1 June 2019 to 31 March 2020. Candidates sitting ATX (UK) after 31 March 2020 should refer to the Finance Act 2019 version of this article (to be published on the ACCA website in 2020).

So far in this article we have considered exam technique and five of the 11 fundamental technical issues.

6. Inheritance tax – the structure of the tax
Inheritance tax consists of an underlying structure or framework with lots of detailed rules. The key to a strong performance in the exam is to be absolutely sure of the underlying structure and to know as many of the detailed rules as possible. A weak knowledge of the underlying structure is likely to be fairly costly whereas forgetting one of the detailed rules is unlikely to matter as much.

The underlying structure can be thought of as being in two parts; lifetime transfers and the tax due on death.

Lifetime transfers
When dealing with a lifetime transfer it is necessary to:

  1. Value the transfer (taking into account the valuation rules, fall in value of the estate and related property).
  2. Deduct exemptions
  3. Deduct reliefs (see below)

If the transfer is a chargeable lifetime transfer (ie not a potentially exempt transfer) inheritance tax will be charged on the amount of the transfer that exceeds the nil band at the time of the transfer.

The nil band at the time of the transfer will be reduced by chargeable lifetime transfers (ie ignore any potentially exempt transfers at this point) in the seven years prior to the transfer.

The rate of tax will be either 25% (if the donor is paying) or 20% (if the donee is paying). Where the donor is paying the tax, the gross transfer is the transfer (the amount after step 3 above) plus the tax.

Tax due on death
Where the taxpayer has died, the transfers in the seven years prior to death and the death estate itself must be dealt with. The three steps set out above must be carried out for each transfer in chronological order.

Inheritance tax will be charged at 40% on the amount of the transfer that exceeds the nil band at the date of death.

The nil band at the date of death will be reduced by chargeable transfers (ie all transfers, potentially exempt and chargeable lifetime) in the seven years prior to death.

Finally, deduct taper relief and any lifetime tax paid before moving on to the next gift.

The death estate should be treated as a final gift in accordance with the previous paragraphs. The point to watch for here is that the annual exemption is not available in respect of the death estate.

7. Inheritance tax – reliefs
Agricultural property relief and business property relief are important as they do not have an upper limit and can therefore potentially relieve the whole of a transfer. There are detailed conditions that must be satisfied in order for these reliefs to be available. The conditions relate to the type of property and the period for which it has been owned. You must learn the conditions.

8. Corporation tax – accounting periods
A corporation tax computation is prepared for an accounting period. The length of the accounting period affects the limits when determining whether or not payment by instalments is required. The end of the accounting period affects the date on which corporation tax is payable.

Each time an accounting period ends a corporation tax computation is required and a new accounting period starts. An accounting period also starts when a company comes within the charge to UK corporation tax (for example by acquiring a source of income or commencing to trade).

The accounting period will end on the earliest of:

  • 12 months after it began
  • the end of the company’s period of account
  • the company beginning or ceasing to trade
  • the company becoming or ceasing to be UK resident
  • the company ceasing to be within the charge to UK corporation tax
  • the company entering or ceasing to be in administration.

You should note that an accounting period does not come to an end when a company is purchased, even though it may be necessary to time apportion its profits pre and post the date of the change of ownership for the purposes of group relief.

This review of the fundamental technical issues will be completed in the next, and final, part of this article.

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.

Written by a member of the ATX (UK) examining team